Swiss ready for say-on-pay vote

AgneseSmith

Roland zh/Wikimedia

Occupy protestors at the Paradeplatz in Zurich late last year.

ZURICH (MarketWatch)—While the Occupy Zurich movement did not capture the world’s imagination in quite the same way as protests in London or New York, national votes in Switzerland on “fat cat” salaries later this year or early next may deliver results to make the radicals proud.

Thanks to the Swiss tradition of direct democracy—which allows citizens to put an issue on the national agenda if enough signatures are collected—citizens here will get to decide whether to expand shareholder rights to limit executive pay in publicly listed companies like food giant Nestle
NSRGF, +2.01%
(NESN) .

This includes barring golden parachutes, requiring shareholder votes on pay and setting criminal penalties for transgressors—strong stuff for a country that is famous for its hands-off industrial policy and self-regulation. If the so-called “rip-off” salary proposal passes (a very big if considering Switzerland’s history of turning down popular initiatives), the country will go from one with the least amount of shareholder say on pay legislation to one with the most teeth.

“This is indeed a radical proposal,” said Daniel Daeniker, partner at Homburger AG, a Zurich law firm. “But I don’t think this is a watershed moment given that the Swiss tend to be pragmatic in the end. Usually, reason prevails.”

In Switzerland, as elsewhere, executive compensation and corporate governance is in the crosshairs of both government and voters due to the continuing fallout from the global economic crash and venom directed at those deemed responsible. This goes hand-in-hand with public anger at what is perceived to be excessive and unearned rewards. The difference in Switzerland is that citizens here can effect change directly.

Other initiatives aimed squarely at the rich are also in the cards here. The “Young Socialists” launched their own version of say on pay, calling for a maximum ratio of 1:12 between the lowest and the highest salary, though many dismiss this as having little chance of passing. More worrying for the wealthy is the proposal to stiffen inheritance taxes, which has sent many people scrambling to consult lawyers.

While Switzerland still remains among the most business friendly nations in the world, the current initiatives have sparked a broader debate among the population over redistributive justice. That’s not particularly helpful for a government that is trying to attract multinationals with a blend of low taxes and minimal intervention.

The rip-off salary initiative, led by entrepreneur Thomas Minder, who is now a senator, started life in 2006 and was lodged in Parliament in pre-crisis February 2008 after garnering the required 100,000 signatures. In response, the government has formulated its own milder, counter-proposal.

The heart of the Minder initiative is the proposal that shareholders at the annual general meeting approve the total pay awarded to the board of directors, executive board and advisory board. The decision would be binding. Also under the initiative, shareholders, as opposed to the board of directors, would elect the chairman of the board and the members of the compensation committee. Any contravention against these rules would constitute a criminal offense.

This is a serious departure from the current situation where at least on paper shareholders essentially have little say on pay. To date, the boards of directors of Swiss companies have the legal power to decide on its own and the rest of management’s remuneration, though many listed companies submit their compensation report to shareholder approval based on recommendations by a self-regulatory instrument known as the Swiss Code of Best Practice on Corporate Governance. In many other OECD countries, shareholders must, at the very least, be consulted on pay. In the Netherlands, Denmark and Sweden, votes are binding.

The initiative also calls for directors, the chairman and the compensation committee to be elected on an annual basis, as is now the practice in many other countries. Currently, three-year terms are common in Switzerland.

Whether Switzerland needs to beef up corporate governance is a matter of debate, though the government has already conceded that “pay policy cannot continue to be self-regulated,” according to the Federal Department of Justice and Police web site. In reality, many Swiss firms have recently taken up the practice of consulting shareholders on pay even if they are not legally obliged to do so, thanks in part to shareholder pressure.

Experts in Switzerland and outside argue that corporate governance here is robust. Self-regulation on the whole works well, the proof of which is the high profitability of Swiss companies, the general health of the economy and the harmoniousness of employee relations.

While forecasting that the Minder initiative would likely lose some of its bite through the legislative process even if endorsed, many in the financial and legal community—and more importantly the government—are concerned that a yes vote could drive away business as well as discourage potential corporate leaders.

“This is a very dangerous initiative,” said Maurice Zufferey, managing partner at executive recruiting firm Spencer Stuart Switzerland. If it passes, “it will make Swiss-based companies less competitive in attracting talent.”

Even so, shareholder activists welcome more stringent requirements. “Further regulation in Switzerland is needed in order to strengthen shareholder rights,” said Vinzenz Mathys, corporate communications manager at Ethos, which has about 120 members, mostly from Swiss pension funds, in an email. However, Ethos, which has spearheaded say on pay in Switzerland, has yet to take a stand either on the Minder initiative or the government’s counterproposals.

Ethos has in the past complained about the lack of transparent rules and what it considers over-the-top remuneration for the country’s biggest companies. An Ethos study found that executive remuneration in 48 listed companies was deemed “excessive” and “inappropriate,” particularly given their firms’ performance.

Swiss companies have only had to disclose management salaries since 2007. Traditionally, CEOs in Swiss companies, many of whom hail from other countries, are better paid than European peers, according to compensation companies.

In terms of international measurements from the likes of the World Bank and the World Economic Forum—usually a cheerleader for all things Swiss—the country does not rate highly in certain areas. The World Bank Ease of Doing Business report places Switzerland at a staggering 166 out of 183 in terms of investor protection, on par with Iran. Switzerland consistently tops WEF lists in terms of global competitiveness, but earns only a middling rank in terms of protection of minority shareholders.

It’s too early to say how the Swiss will ultimately vote, though polls reportedly show public sympathy for the Minder initiative. After much horse trading and (rather confusing) compromises, the government has come up with alternatives. It will allow voters to decide whether compensation in excess of 3 million CHF per year, for listed and unlisted companies, should no longer be tax-deductible on a corporate level.

Concerning golden parachutes and other payoffs, parliament has proposed leaving room for exceptions if they are accepted by two-thirds of shareholders. In terms of annual votes on pay, the counterproposal allows shareholders to opt for a mandatory or consultative vote on executive salaries. As for electing the board of directors, the counterproposal advocates giving companies the option of voting every two or three years as opposed to annual elections.

Ironically, Swiss CEOs are no longer top dog in terms of pay, according to Towers Watson, although whether this is due to normal market forces or pressure is not clear. Average CEO direct pay for Swiss listed companies in the 2011 reporting season totalled 5.4 million Swiss francs ($5.9 million) compared to 5.86 million francs for Germany’s leading companies and 7 million francs for leaders of DJ Stoxx Europe 50 companies, said Towers Watson.

“CEOs in Switzerland do not any longer earn more than the CEOs in the other indices,” Hans Muench, senior manager at Towers Watson Zurich, said in emailed comments. “Of course, these are average numbers and there are many reasons for this, including CEOs coming and going and the reduced bonuses in the banking industry.”

Perhaps a bigger question is how these initiatives are going to be viewed by highly mobile multinational companies—somewhat unused to controversy in Swiss corporate law—that now form such a big part of the Alpine country’s economy.

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